Back To HB 4050

Marty Sandoval comments on the demise of HB 4050

State Sen. Martin Sandoval (D-12th), chairman of the Commerce and Economic Development Committee,  also weighed in on the federal legislation, expressing the belief that it “is not enough to save jobs, help homeowners avoid foreclosures and restore credit to consumers.”

“It is evident that HB 4050 that House Speaker Michael Madigan and I sponsored, and which Gov. Blagojevich suspended, was ahead of this crisis,” he said, asserting that the pilot program that mandated credit counseling for homebuyers in certain circumstances “would have protected many of our neighborhoods on the Southwest Side of Chicago.”

Sandoval called the bailout “a small bandage on an enormous bleeding gash. What Congress approved…is not a permanent solution. Our economy is still hurting and further action is needed.”

It is “outrageous” that it is even needed, he added.

I’ve talked about HB 4050 before here and here.

Rich points out the connection between predatory lenders and some ministers, but in the bigger picture of what has happened to the housing market, Madigan and Sandoval were dead on target.  When  you look at the mortgages issued with credit counseling in metro areas, the default rate is 46 percent lower than non-credit counseled home buyers in lower income brackets (pdf)

Morons still insisting that Fannie and Freddie lending practices were the problem need a dose of reality:  Fannie and Freddie did very little Subprime lending or Alt-A lending:

Fannie Mae owns or guarantees $51.2 billion of subprime loans, those given to borrowers with bad credit histories, a category that makes up about 2 percent of its total mortgage holdings, according to the company’s Web site. Subprime mortgages default at five times the rate of prime mortgages, according to the Mortgage Bankers Association in Washington.

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Less than 1 percent of its loans, or $20.6 billion, are payment-option adjustable-rate mortgages that let borrowers pay less than they owe each month, with the unpaid balance added to the principal.

And those loans that are subprime–typically are only issued with a credit counseling programs.  Those who blame Fannie and Freddie for the subprime crisis are lying, stupid, or both. That doesn’t mean they were well run, but they aren’t the problem with subprime loans because they didn’t participate in such loans very much. The loans Fannie and Freddie had originated are in very good shape. What is not in good shape is described here:

MY COLLEAGUE points out Fannie and Freddie were not entirely at fault. That is absolutely correct. For things to go so epically wrong many factors must contribute. I should clarify—if you look amongst all the causes of this mess, Fannie and Freddie were the rot in the foundation.

The cause of market failure often plays out in a subtle manner. The mere existence of the GSEs did not cause market failure, but their size did. Their implicit government guarantee allowed them to create a portfolio of mortgage-backed securities (MBS) purchased in the market. This porfolio grew exponentially during the last fifteen years. Policy makers spent the last decade warning of the systemic risks a portfolio of this size posed.

Fannie and Freddie did not simply purchase and package loans. This part of their operation functioned well and under regulation appropriate for a GSE. The problem was the lack of oversight combined and the implicit guarantee that fueled growth in their asset portfolios. This growth was a recent phenomenon, which began in the mid 1990s. Alan Greenspan, warning of the systemic risks posed by Fannie and Freddie in a 2005 speech, noted:

When Freddie Mac became owned by private shareholders and began to realize the potential for exploiting the risk-adjusted profit-making of a larger portfolio, the message changed. Freddie stated in its 1993 annual report that “in short, to achieve our earnings objective, we are striving to increase our total portfolio at a rate faster than residential mortgage debt growth … [and] generate earnings growth in excess of revenue growth through focused management of credit and operating expenses.” By 2003, Freddie’s portfolio had grown tenfold, and Fannie and Freddie together held $1.5 trillion in assets, or 23 percent of the home-mortgage market.

Bold mine.  The overall problems in the market have nothing to do with the CRA or Fannie and Freddie originated loans.  The problems were generated from Alt-A and subprime loans that had little involvement in CRA or the GSEs on the front end.  Even then the issue for GSEs was that the market lost a ton of money–not just temporary liquidity, but money was lost on bad investments in MBSs.  So when Fannie and Freddie would have to borrow more money, the money was expensive and that squeezed their capital requirements and that is what led to their bailouts.

Who is to blame for this mess–those assholes predatory lenders that Blagojevich bowed to.

Sandoval and Madigan were doing the right thing. For all of his bluster about looking out for the public, Rod Blagojevich sold out the homebuyers in Illinois to a bunch of predatory lenders who didn’t want borrowers to know what they were doing.  Remember that the next time he tries to criticize anyone, but especially John Fritchey who represented a payday loan company in a zoning matter.  Fritchey isn’t the one who got in the way of educating consumers to make good financial decisions. Rod Blagojevich is.